Case 3 The Adidas – Reebok Merger.pdf

8/10/2019 Case 3 The Adidas Reebok Merger.pdf

1/22

The AdidasReebok Merger

The case discusses the proposed merger of ReebokInternational Limited with Adidas-Salomon AG. It describesthe recent trends and studies the ongoing merger in the

sporting goods industry. The case presents the rationale

behind the decision to merge. Finally, the case ends with adebate on whether the merger would be successful.


2/22


3/22

275


We want to grow both brands together faster than the individual brands and of

course, grow faster than our competitors.1

- Herbert Hainer, Chief Executive Officer, Adidas, in 2005.

With Adidas, we are able to offer an enabled portfolio of global brands that truly

addresses the needs of todays and tomorrows consumers.2

- Paul Fireman, Chief Executive Officer, Reebok, in 2005.

Buying a competitor achieves two objectives, both good. It removes a competitor and

it increases your market share. As long as the price is right, its generally a good

move.3

- Al Ries, Chairman, Ries and Ries Consulting in 2005.4

For the first time, Nike, which is actually leading the charge, has to look back over

their shoulder at someone who is nipping at their heels.5

- Marshal Cohen, Chief Industry Analyst, NPD Group in 2005.6

Introduction

On August 03, 2005, Adidas-Salomon AG (Adidas), Germanys largest sporting goods

maker announced acquisition of the US-based Reebok International Limited (Reebok) for

$3.8 billion. The share prices of both the companies recorded an increase on the day of the

announcement of the deal. The share price of Adidas increased by 7.4% from 147.52 on

August 02, 2005 to 158.45 on August 03, 2005 on the Frankfurt stock exchange, while

Reeboks share price at the New York Stock Exchange rose to $57.14 on August 03, 2005,

an increase of 30% over the August 02, 2005 share price of $43.95 (Refer Exhibit I for

share price movement of the two companies).The deal would result in the union of two

cutthroat competitors through a friendly takeover.

1 Darren Rovell, Reebok, Adidas Have Plenty of Issues to Solve, www.ESPN.com, August03 2005.

2 Press Release, www.adidas-salomon.com, August 04, 2005.3 The Merger of Titans, November 2005, Effective Executive, IUP India.4 Ries and Ries is a business consultancy, based in Atlanta, Georgia.5 Laura Petrecca and Theresa Howard, Adidas-Reebok Merger Lets Rivals Nip at Nikes

Heels, www.usatoday.com, August 04, 2005.6 NPD group founded in 1967 provides sales and marketing information such as consumer

trends, sales and marketing information for a diverse range of industries.


4/22

Mergers & Acquisitions, and Strategic Alliances

276

Exhibit I

Share Price Movement of Adidas-Salomon AG, August 2005

Source: www.newsvote.bbc.co.uk

Share Price Movement of Reebok International Limited August, 2005

Source: www.newsvote.bbc.co.uk

Adidas and Reebok claimed that the merger was decided upon because of the

realization that their individual (company) goals would be best accomplished byjoining instead of competing. Nike International Inc. (Nike) was the common

competitor for both Reebok and Adidas.

Analysts said that the merging companies were alike in many ways. Both the

companies had a reputation of using cutting-edge technologies to produce innovative

products and both had eminent brand ambassadors from the sports and entertainment

worlds. Thus, the merger would help spreading the global appeal of the brands in places

where they had not made a mark as individual brands.

However, some analysts had doubts about the success of the merger of the companies.

They cited that the merger would not generate much synergy because the individual

brand identities would be maintained even after the merger. Analysts also doubted the

effectiveness of the merger, as a strategy to beat Nike. They felt that the combinedentity would have to work really hard to further expand its market share in the US

market and globally.

Background Note

Adidas

The story of Adidas dates back to the year 1920 when Adolf Dassler (Adi) produced a

handmade shoe fitted with black spikes. On July 01, 1924, Adi and his brother Rudolf

Dassler (Rudolf) started a company under the name Dassler Brothers OHG. In the

year 1927, the company enhanced its capacity by taking on a new factory on lease.


5/22


277

The companys shoes made their debut at the 1928 Olympics in Amsterdam. In 1930,

the brothers purchased the factory and named it Dassler Brothers Sports Shoe

Factory. The company introduced tennis shoes in 1931. In the year 1935, the

turnover of the company exceeded 400,000 Reichsmark7. In 1938, a secondproduction facility was bought in Herzogenaurach, Germany.

In 1948, the brothers decided to part ways. By August 18, 1949, Adidas was registered as a

company -Adi from Adolf and Das from Dassler. Adi registered the Three Stripes8as

his official logo. Rudolf set up another sporting goods company named Puma.

In 1956, Adis son Horst Dassler (Horst) promoted Adidas strongly during the

Olympic Games at Melbourne. He also signed a licensing agreement with the

Norwegian Shoe factory, located in Gjovik, Norway. In 1959, Horst was assigned the

job of establishing production facilities in France. A factory in Schweinfeld, Germany

was started in the same year. In 1960, Adidas was the dominant brand at the Olympic

Games held in Rome; 75% of the track and field athletes used Adidas shoes. Adidas

stepped into the production of apparel and balls (soccer balls, basketball balls) in 1961and started manufacturing track suits in 1962.

The company launched its first jogging shoe called, Achille in 1968. The Trefoil

Logo was introduced in 1972 (Refer Exhibit II). The essential feature of the logo was

three leaves representing the Olympic spirit, joining the three continental plates .The

company used the achievements of the famous sportspersons like Muhammad Ali

(boxing), Jesse Owens (athletics) and Franz Beckenbauer (soccer) for promoting the

brand. In 1975, Adi became a member of the National Sporting Goods Association

(NSGA)9 and the first non-American to enter the NSGA Hall of Fame. Adi passed

away in 1978 and his family began to oversee the business, which by then produced

45 million pairs of shoes in a year.

Exhibit II: The Trefoil Logo of Adidas

Source: www.adidas-salomon.com

7 The Reichsmark was the currency in Germany from 1924 till June 20, 1948. In 1948, it wasreplaced by the Deutsche Mark in West Germany and by the East German Mark in EastGermany.

8 The Three Stripes were originally developed as a means to stabilize the mid-foot. Adidas appareland shoe designs featured three parallel stripes of the same color, and it became the official logoof the company.

9 The NSGA was founded in 1929 in New York City, by a group of sporting goodsdistributors. The mission of NSGA is to help its members to profit from a competitivemarketplace.


6/22


278

Horst died in 1987. In 1990, Bernard Tapie10

(Tapie) bought the company for $320

million on borrowed money from Credit Lyonnais bank11

. In 1992, the bank converted

the debt into equity when Tapie failed to pay the interest on the loan. Credit Lyonnais

sold Adidas to Robert Louis-Dreyfus (Dreyfus) who was a friend of Tapie, inFebruary 1993. Dreyfus became the new CEO of the company in 1994. Under the new

management, Adidas stepped up its marketing efforts.

In 1995, the company got itself listed on the Paris12

and Frankfurt13

Stock Exchanges.

In 1997, Adidas entered into endorsement deals with top young sports stars like Anna

Kournikova (lawn tennis), Kobe Bryant (basketball) and David Beckham (soccer) to

promote its contemporary products. In the same year, Adidas acquired the French-

based Salomon Group14 for $1.4 billion. The company has since then been called

Adidas-Salomon AG. In 1998, Adidas was included in the DAX15

index.

In March 2001, Herbert Hainer (Hainer) became the CEO and Chairman of the company.

The companys business segments included footwear, apparel and hardware/equipment

(Refer Exhibit III for product profile of Adidas).In 2004, with 110 subsidiaries and morethan 17,000 employees, the company achieved sales of 6.478 billion and profits of 314

million (Refer Exhibit IV for financial summary of Adidas).

Exhibit III: Product Profile of Adidas-Salomon AG

Segments Products Important Brands

Footwear Footwear, ski boots and bindings, snow

blades, golf shoes

Adidas, Taylormade Golf,

Salomon

Apparel Snowboard apparel, hiking, apparel,

Outdoor apparel, golf apparel

Adidas, Salomon,

ArcTreyx, Bonfire

Equipment Winter sports including skis,snowboards, inline skates, climbing

equipment, skateboard equipment,

cycle components, golf equipment such

as golf balls, irons and accessories and

equipment such as bags and balls

Adidas, Salomon,ArcTreyx, Clich,

Maxfli, Taylormade Golf,

Mavic


10 Tapie was a minister of Urban Affairs in the French Government and he was well-knownfor rescuing bankrupt companies.

11 Credit Lyonnais is a French bank founded in 1863 by Henri Germain.12

The Paris Stock Exchange is the second largest stock exchange in Europe. It is called as LaBourse de Paris. It is a part of Euronext, a European Stock Exchange with subsidiaries inBelgium, France, Netherlands, Portugal and United Kingdom.

13 The Frankfurt Stock Exchange is located in Frankfurt, Germany. It is called the DeutscheBorse and is the largest of eight German exchanges.

14 Salomon Group founded in 1947, is a French-based worldwide leading producer of ski, golf,and winter sports equipment headquartered in Annecy, France. Its brands include Salomon,Mavic, Bonfire, Clich, ArcTrex, Taylormade, Firesole clubs, Salomon-in-line skates, etc.The group was sold to Finland-based Amer Sports Corporation for 485 million in May2005. The deal was expected to be completed by September 2005, pending an approval inseveral countries.

15 DAX is an acronym for Deutscher Aktienindex. It is a German stock performance index thattracks the performance of 30 top German stocks.


7/22


279

Exhibit IV: Financial Summary of Adidas

Year Ended December 31

(in mn except basic earnings per share and diluted earnings per share)

Particulars 2004 2003 2002 2001 2000

Net Sales 6,478 6,267 6,523 6,112 5,835

Net Income 314 260 229 208 182

Basic earnings

per share ()

6.88 5.72 5.04 4.60 4.01

Diluted earnings

per share ()

6.54 5.72 5.04 - -

Total assets 4,427 4,188 4,261 4,183 4,018

Long-term debt 863 1,225 1,574 1,570 1,617

Stockholders

equity

1,628 1,356 1,081 1,015 815

Source: Annual Report 2004

Reebok

The history of Reebok can be traced back to Joseph William Foster (Foster) who

founded J.W.Foster and Sons in the United Kingdom in the 1895. Foster

manufactured the first ever shoes with spikes to help athletes run faster. The spiked

shoes had their debut on the track in the 1924 (Summer) Olympic Games.

In 1958, two of Fosters grandsons started a company and named it Reebok

International. Reebok was a type of African gazelle

16

. In 1979, Reebok Internationalsecured distribution rights in the US, allowing it to sell its shoes in North America

through Paul Fireman (Fireman). Fireman was then an associate in the outdoor

sporting goods distributorship of the company. Later, the same year, Fireman formed

a company called Reebok USA Limited.

In the early 1980s, Reebok International marketed its products through a large

association of independent and owned distributors. By the end of 1981, Reeboks

sales surpassed $1.5 million. In 1982 the worlds first athletic shoe specifically for

women was launched; it was called Freestyle. In 1984, Reebok International and

Reebok USA limited merged and Reebok International Limited was formed. In 1985,

Reeboks sales reached $307 million. Reebok came out with its Initial Public Offering

(IPO) the same year. Stock issued to the public at $6, rose to $38 by 1986. In 1986,

Fireman became the chairman of the company.

Reebok made a series of acquisitions in the late 1980s. It purchased the Rockport

Company17 in 1986, Avia Group International18 in April 1987 and Ellesse

International S.P.A.19

in September 1987. In 1989, it acquired CMIs Boston Whaler

16 African gazelles are small, swift antelopes characteristically having a slender neck andannulate horns.

17 Rockport Company manufactured high-performance walking shoes.18 Avia Group International was an Oregon-based athletic shoe company.19 Ellesse International S.P.A. was an Italian manufacturer of sportswear and casual wear.

Reebok used the company as a distributor in Italy.


8/22


280

unit20

. These acquisitions enabled Reebok to acquire distribution channels from these

companies. In 1989, Reebok introduced a new ground-breaking product called the

Pump shoe using the Pump21Technology. In the same year, it also initiated Step

Reebok, an international fitness program after conducting comprehensivebiomechanical research

22.

Apart from being principally identified with fitness and exercise, Reebok wanted to

get equally involved in sports. In 1992, it created shoes and apparel specifically for

sports like baseball, football, soccer, and track and field events. In the same year, the

company also signed sponsorship contracts with several renowned sportspersons like

Allen Iverson (basketball) and Venus Williams (lawn tennis). Reebok developed a

training program for trained exercisers and beginners in 2000 called Reebok Core

Training. The program was based on physical and athletic treatment focusing on the

quality of movement. Reebok also introduced an adjustable resistant Reebok Core

Board used as a part of the training program to create an extremely effective and

flexible workout.

Reebok entered into a partnership with the National Football League 23(NFL), USA,

in December 2000 to manufacture, advertise and sell NFLs licensed merchandise like

on-field uniforms, sideline apparel, practice apparel, footwear and an NFL-branded

apparel line from the NFL season starting 2002. The 10-year exclusive license gave

Reebok the right to supply merchandise to all the 32 teams and also led to the

introduction of new product categories such as Equipment,24

and Classics25

.

Reebok entered into a strategic partnership with the National Basketball Association26

(NBA) in August 2001 for a period of 10 years. This contract gave the company exclusive

rights to design, make, sell, and market certified products such as NBA-branded basketball

shoes, uniforms, shooting shirts, warm-ups, authentic and replica jerseys and practice gear,

headwear, T-shirts, fleece and other apparel for the NBA, Womens NBA (WNBA), and

National Basketball Development League (NBDL) teams.

Reebok also entered into a partnership with Indy Racing League27 (IRL) to be its

official outfitter in February 2002. According to the deal, Reebok created Reebok-

Indy Racing League apparel for all IRL officials and selected teams and also sported

20 CMIs Boston Whaler manufactured and sold power boats for the US government and forrecreational use.

21 Pump Technology allowed an exact fit with the push of a button. Later the model was enhancedto create the model Pump 2.0 which did not require shoelaces, did not absorb moisture and couldinflate by itself.

22 Through biomechanical research, Reebok studied the mechanics of a living body, especiallyof the forces exerted by muscles and gravity on the skeletal structure. These studies helped itto follow the movements of athletes during their activities and design various fitness

programs for them to remain healthy.23 National Football League (NFL) is the largest and most popular professional American

football league comprising 32 teams. It was formed in 1920 as the American ProfessionalFootball Association, and later adopted the NFL name in 1922.

24 Equipments included skates, sticks, helmets, protective equipment for shoulder, shin, elbow,pants for games such as hockey and football. It also included fitness equipment.

25Classics have a more contemporary look and appeal. The products included apparel productssuch as Gridiron, Hardwood, and Traditional Classics.

26 National Basketball Association (NBA) was founded in New York on June 06, 1946, as theBasketball Association of America. It is the worlds premier mens professional basketballleague. The name NBA was adopted in 1949.

27 Indy Racing League (IRL) is the promoter of open-wheel racing series in the US and Japan. Itwas initially owned by Hulman and Company but was later brought by Tony George in 1994.


9/22


281

its logo on race cars and other publicity programs of IRL. This made Reebok-IRL

products available at all IRL events, via online, and through selected outlets28

.

In January 2002, Reebok initiated a worldwide marketing drive, called the Sounds &Rhythm of Sport. The campaign featured Reebok sponsored NBA, NFL, and tennis

players together with top performers in the music industry. In the same year, Reebok

also launched a product line called Rbk which was a collection of street footwear,

apparel and accessories for young men and women who valued style. In 2004, Reebok

made sales of $3.785 billion and profits of $192.4 million (Refer Exhibit V for

financial summary of Reebok).Its products were available in more than 170 countries.

The major brands were Ralph Lauren, Rockport, Greg Norman (Refer Exhibit VI for

product profile of Reebok).

Exhibit V: Financial Summary of Reebok

Year Ended December 31

(in 000 $ except basic earnings per share and diluted earnings per share)

Particulars 2004 2003 2002 2001 2000

Net Sales 3,785,284 3,485,316 3,127,872 2,992,878 2,865,240

Net Income 192,425 157,254 126,458 102,726 80,878

Basic earnings

per share ($)

3.26 2.65 2.12 1.75 1.42

Diluted earnings

per share ($)

3.05 2.43 1.97 1.66 1.40

Total assets 2,440,628 1,989,742 1,860,772 1,543,173 1,463,046

Long-term debt 460,753 353,388 353,454 351,307 358,828

Stockholders

equity

1,219,956 1,033,710 884,570 719,938 607,863


Exhibit VI: Product Profile of Reebok International Limited

Product Lines Brand Total Sales In 2004

Rbk branded footwear, apparel products

and accessories for men and women

Reebok US $1.65 billion

International

$ 1.54 billion

Slippers, outerwear, hosiery and duty and

work footwear for men, women and kids

Rockport$377.6 million

Traditional Classics, Gridiron,

Hardwood.

Polo Jeans, Polo T-Shirts Company

line and Childrens line

Dress and casual silhouettes

Polo Sports,

Ralph

Lauren,

Classics***

28 Indy Racing League Media Relations, www.racingwest.com, February 21, 2002.


10/22


282

Product Lines Brand Total Sales In 2004

Wovens, Play Dry Winterknit Outerwear

and Sweaters collection for women

Greg

NormanCollection

***

Hockey equipment and related apparel

Non-Hockey related equipment such as

alpine skiing and equestrian helmets.

CCM,

JOFA,

KOHO$146 million

* * * Both Ralph Lauren and Greg Norman together had sales of $209.8 million.

Source: www.reebok.com

The Sporting Goods Industry

Mergers and Acquisitions (M&As) had become quite common in the sporting goods

industry during the late 1990s and the early 2000s. Adidas acquired the SalomonGroup for $1.4 billion in 1997. Nike acquired Converse29 in 2003 for $305 million,

while Reebok acquired The Hockey Company30

in 2004 for $330 million. These

mergers were prompted by the increasing competition and growth in the industry.

The US market is the largest market for sporting goods. Experts estimate that the US

sporting goods market will grow at a rate of approximately 8.9% between 2004 and

2008 to reach a value of $51 billion, forming 47.6% of the world market. It is estimated

that 33% of the athletic footwear purchased by the US consumers is used for sports and

fitness activities and bought on the basis of price, comfortability and fashion. In 2004,

40% of the consumers of sports apparel lay in the age group 12-24. T-shirts and running

shoes were considered as the top selected categories. In 2004, sports apparel retail sales

in the US were worth $38.8 billion - compared with $37 billion in 2003. Athletic

footwear retail sales were $16.4 billion in 2004, compared with $15.9 billion in 2003.

The key players in the sporting goods industry were Nike, Adidas and Reebok. Nike

and Reebok were the two biggest players in the US athletic footwear and apparel

market controlling about 36% and 12% of the market respectively, while Adidas had a

share of about 9%. Nike controlled about 33% of the global athletic shoe market,

9.6% was controlled by Reebok, while Adidas had 15.4%. (Refer Table I for company

comparison). All the three brands have been competing fiercely in the highly

profitable US market since 1980. Reebok lost its position as market leader to Nike

during 1989-90. Among the other players were New Balance, Fila, and Puma.

Table I: Comparative Position in 2004

Particulars Adidas Reebok Nike

Year Founded 1949 1895 1962

Headquarters Herzogenerauch,

Germany

Canton,

Massachusetts

Beaverton,

Oregon

29 Converse was a US based shoe company founded in 1908. It went bankrupt in 2001 due tonew competitors who introduced radical designs into the market. Its brands included AllStar Chuck Taylor, Jack Purcell and Heritage.

30 The Hockey Company, a Montreal based company having its operations in Europe, and theUS, is the worlds biggest designer, manufacturer and marketer of hockey equipment andrelated apparel. It had brands like CCM, JOFA and KOHO.


11/22


283

Particulars Adidas Reebok Nike

Employees 17,000 9,102 24,667

Major Brands Adidas, Salomon,

Mavic, Bonfire,

ArcTeryx, Adidas

Golf, Taylormade

Adidas Golf,

Maxfli

Reebok, Reebok

Classic, Rockport,

Rbk, Greg

Norman

Collection, The

Hockey Company

Nike, Nike Golf,

Converse, Cole

Haan, Bauer

Nike Hockey,

Exeter Brands

Group

Hot Product Intelligent shoe

with embedded chip

that conforms for

better support

Rapper Nellys

footwear and

athletic line

coming late 2005

Lance

Armstrongs 10/2

apparel line

introduced in

July

US athletic shoe

market share

8.9% 12.2% 36.3%

Global athletic

shoe market

share

15.4% 9.6% 33.2%

Annual Revenue $7.9 billion $3.8 billion $12.3 billion

Annual Net

Income

$326.5 million $192.4 million $1.2 billion

Current Market

Capitalization

$8.9 billion $2.6 billion $16 billion

Source: Theresa Howard and Kelly Barry, How Adidas and Reebok stack up against Nike,

www.usatoday.com, August 04, 2005.

The Boston (U.S.)-based New Balance was founded by William J. Riley (Riley) in

1900s. The company made shoes which helped in correcting orthopaedic foot problems.

It produced Trackster in 1961 which became the first running shoe to feature a rippled

sole with multiple widths. The company was bought by Jim Davis in 1972. The

company sold its products under the brands New Balance, Dunham, PF Flyers, Aravon

and Warrior Lacrosse. The company had sales of $1.5 billion for the year 2004.

The German-based Puma was founded by Rudolf Dassler in the year 1948. The company

was converted into a corporation with its stock offered on the Munich and Frankfurt stock

exchanges in 1986. It was the first sports shoe manufacturer to use the vulcanization

method of production. It offered shoes with SPA technology, Velcro fasteners, Duoflexsole and Inspector system made especially for children. The companys main brands are

Puma and Tretorn, distributed across 80 countries. Puma has endorsement deals with

popular sportsperson like Serena Williams (lawn tennis), Michael Schumacher (formula

one/auto race), Travis Pastrana (motor car race), and Vince Carter (basketball). Puma

recorded sales of 1,530.3 million and profits of 257.3 million for the year 2004.

The Merger

According to the merger deal, Adidas would buy all the outstanding shares of Reebok

at $59 per share in cash. This price represented a premium of 34.2%, as per the

closing share price of $43.95 on August 02, 2005. Adidas proposed to fund the


12/22


284

purchase through an arrangement of debt and equity. The deal price was equal to the

latest twelve month sales of Reebok and 11.7 times its EBITDA31

. Some analysts felt

that the deal was priced too high. As Uwe Weinrich, an analyst at HVB Group32

remarked, The price Adidas will pay for Reebok is ambitious.33 He added thatacquisitions in the sporting goods industry rarely brought in good returns.

However, Adidas expected that the merger would make it stronger and would enhance

its shareholder value. Hainer said, We see a lot of benefits in combining these two

powerful companies. They both have strong identities and heritage, yet they

complement each other very well34

. Hainer also said that the deal was not strictly

about dethroning Nike.

The merger was subject to approval by the shareholders of Reebok, the European Union

and the US Federal Trade Commission. Fireman and his wife Phyllis, who collectively

owned about 17% of Reeboks outstanding shares, agreed to vote their shares in favor of

the transaction. Adidas expected to close the transaction in the first half of 2006.

The Synergies

Both the companies claimed that their missions were complementary. As Fireman

remarked, Adidas is a perfect partner for Reebok. Reeboks mission is to enroll global

youth inclining towards the music-and-lifestyle image that it promotes through sports,

music and technology. This complements Adidass mission to be the leading sports brand

in the world, with a focus on performance and international presence. (Refer Exhibit VII

for mission statements of Adidas and Reebok).

Exhibit VII: Corporate Mission of Adidas

Adidas-Salomon strives to be the global leader in the sporting goods industry withsports brands built on a passion for sports and a sporting lifestyle.

We are consumer focused. That means we continuously improve the quality,

look, feel and image of our products and our organizational structures to match

and exceed consumer expectations and to provide them with the highest value.

We are innovation and design leaders who seek to help athletes of all skill

levels achieve peak performance with every product we bring to the market.

We are a global organization that is socially and environmentally responsive,

creative and financially rewarding for our employees and shareholders.

Contd

31 EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.EBITDA is an approximate measure of a companys operating cashflow. This measure is ofinterest to creditors as it is an indication of the income a company has free of interestpayments.

32 HVB Group is one of the five biggest banks in Europe and is the second largest quoted bankin Germany. It has 2,062 branch offices with core markets in Germany, Austria and Centraland Western Europe. Its main businesses include European retail and mid-cap customerbusiness supplemented by customer-oriented capital market activities.

33 Adidas Paying $3.8 Billion for Reebok, www.smartmoney.com August 03, 2005.34 Reebok Transaction and First Half Year Results 2005 Financial Results Presentation,

www.adidas-salomon.com, August 03, 2005.


13/22


285

Contd

We are committed to continuously strengthening our brands and products to

improve our competitive position and financial performance.

In the medium term, we will extend our leading market position in Europe,

expand our share of the US footwear market and be the fastest growing major

sporting goods supplier in Asia and Latin America. The resulting top-line

growth, together with strict cost control and working capital improvements,

will drive over-proportionate earnings growth.


Corporate Mission Statement of Reebok

Reebok is a true partner with its customers and is relentlessly committed to their

success. Built on a foundation of trust, listening and innovation, we are our

customers most valued resource for quality products and information and theleading authority in sports and fitness.

Our purpose is to ignite a passion for winning, to do the extraordinary, and to

capture the customers heart and mind. Reebok has a fun, energetic culture driven

by the value we place on people, our greatest asset. We embrace diversity in its

fullest sense. We act with integrity and operate through confident, empowered

teams. With courageous leadership, we stay focused on what is most important to

our customers. We have a deep-felt commitment to operate in a socially

responsible way and we stand for human rights throughout the world.

We are committed to excellence and innovation in everything we do. We

demonstrate our excellence by setting exceptional performance standards, which

we then achieve through focused perseverance and vigorous execution. Innovation

and magical ideas drive our company to create powerful breakthrough products and

inspirational marketing and advertising.

Our passion for winning creates our possibilities. We harness the boundless

creative energy of every individual to make the differences that countto captivate

the consumer and create an exceptional global brand and organization.

We make a difference:

To our customers

To our employees

To our shareholders

To our athletes

And to the world in which we live.

Source: www.ruggedelegantliving.com

Post-merger the merged entity expected to improve its financial performance. As

Hainer said, The combined group would gain cost savings and operating

improvements of 125 million through back-office synergies which would be realized

by financial year 2008.35The merged entity would be able to utilize economies of

35 Reebok Transaction and First Half Year Results 2005 Financial Results Presentationwww.adidas-salomon.com August 03, 2005.


14/22


286

scale. It would be able to concentrate on certain key issues and gain synergies in sales,

distribution and information. I see the synergies very quickly outweighing the

costs,36

said Robin Stalker, Chief Financial Officer, Adidas.

The companies felt that the major driving force behind the merger was greater sales

growth rather than just cost savings. The annual sales of the combined group after

merger was predicted to be $11.7 billion. Fireman noted that post merger, the merged

entity would be in a better position to compete with Nike, which had sales of $12.3

billionin 2004(Refer Exhibit VIII for financial summary of Nike).

Exhibit VIII: Financial Summary of Nike

Year Ended May 31

(in mn $ except basic earnings per share and diluted earnings per share)

Particulars 2004 2003 2002 2001 2000

Net Sales 12,253.1 10,697.0 9,893.0 9,488.8 8,995.1

Net Income 945.6 474.0 663.3 589.7 579.1

Basic earnings

per share ($)

3.59 2.80 2.50 2.18 2.10

Diluted earnings

per share ($)

3.51 2.77 2.46 2.16 2.07

Total assets 7,891.6 6,821.1 6,4443.0 5,819.6 5,856.9

Long-term debt 682.4 551.6 625.9 435.9 470.3

Stockholders

equity

4,781.7 3,990.7 3,839.0 3,494.5 3,136.0


Adidas had only an 8.9% share of the US market. Although the company was doing

well in Europe and Asia, it was not making much progress in North America

compared with Reebok. (Refer Table II for comparison of geographic sales of Adidas

and Reebok). The acquisition was expected to give the companys products a strong

push in the US market because of the link with Reebok.

Table II: Geographic Sales Comparison of Adidas and Reebok for 2004

Adidas Sales (in mn )* Reebok Sales (in mn $)

Europe

North America

Asia

Latin America

3,470

1,486

1,251

224

US

UK

Europe

Others

2,069

475

810

431

Source: Annual Reports of Adidas and Reebok

* 1 = $1.3621 on December 31 2004.

36 Reuters, Adidas to Buy Reebok for $4bn, www.eonomictimes.indiatimes.com, August 04,2005.


15/22


287

John-Paul O'Meara of Dresdner Kleinwort Wasserstein37

said that the move was good

for the long term and would enable Adidas to attain critical mass in the U.S. market.

He further added, Reeboks strength is in major U .S. sports such as basketball, and

not soccer, which is the strength of Adidas.38 With the acquisition, Reebok wouldgain a large presence in Europe and Asia with the help of Adidas. This would make

the combined company hold about a fifth of the sports apparel market worldwide.

Another advantage analysts noted was that the combined company would have more

bargaining power in dealing with suppliers and retailers. As Gavin Finlayson (Finlayson)

of Commerzbank39

said, Adidas, in conjunction with Reebok, has the potential to say,

We want better terms or conditions or well take our business elsewhere.40

The bigger size of the merged entity would enable it to negotiate prices with

manufacturers, secure shelf space at retail outlets, and increase sponsorships and

endorsements, especially in Asia and the US. George Whalin (Whalin), president at

Retail Management Consultants41said, When companies consider a merger like this,

they look at big sporting goods retailersSports Authority, Foot Locker, Dicks andtry to determine the amount of space and prominence of displays they can get.

Owning Reebok greatly enhances the in-store position and leverage for combined

promotions. Its a big deal.42

Post merger the companies would also have a stronger distribution network. Whalin pointed

out that with the deal, Reebok would have access to Adidas globally spread distribution

network and Adidas would have a stronger distribution network in North America.

Adidas and Reebok would be able to accelerate development of innovative products

and product lines in footwear, apparel, and hardware by exploiting R&D expertise

together. Adidas had developed state-of-the-art technologies such as Adidas_143

,

A344

and ClimaCool45

. Reebok, on the other hand, had product innovations including

the Pump 2.0

46

and DMX

47

. This portfolio of innovative products was expected toincrease consumer demand across all brands.

37 The investment banking arm of the German retail bank Dresdner Bank owned by AllianzGroup. It mainly operates from its European bases in London and Frankfurt. It has 30worldwide offices and is renowned for its expertise in the debt capital markets.

38 Jennifer Letki, Adidas to Buy Reebok; 2Q Net Profit Rises 50%,www.news.morningstar.com,August 03, 2005.

39 Commerzbank AG is Germanys third-largest bank after Deutsche Bank and HypoVereins bank.40 Jennifer Letki, Adidas to Buy Reebok; 2Q Net Profit Rises 50%,

www.news.morningstar.com, August 03, 2005.41 A California-based consultancy found by George Whalin which provides business-building

services to retail companies and industry suppliers across North America.42 Laura Petrecca and Theresa Howard, Adidas-Reebok Merger Lets Rivals Nip at Nikes

Heels, www.usatoday.com, August 04, 2005.43 Adidas_1 was called the worlds first intelligent shoe. It was a shoe which could sense and

understand each and every step with changes in speed and surface conditions through amicroprocessor. It was developed to get a perfect level of cushioning at all times.

44 A3 uses the Energy management technology using the polyurethane components whichhelps in efficient cushioning. It uses the Torsion system for giving stability and control tothe midfoot. The technology enables maximum possible shock absorption.

45 ClimaCoolTMis a technology that uses fabrics and ventilation systems to keep a person cool,dry and comfortable during a workout.

46 Pump 2.0 was an advancement of the Pump Technology used by Reebok. The athleticshoes were self inflating and self regulating, providing the consumer with a custom fit.


16/22


288

As far as sports sponsorships were concerned, analysts felt that the deal would allow

Adidas to have access to Reeboks licenses in the NFL and NBA in the US, as it had a

substantial share in the US market and had supply deals with all the major sports

leagues. As Hainer remarked, This portfolio will present us in all the major sport

categories around the world. Reebok is extremely strong in the American sports like

NFL, NBA - and Adidas is very strong in the FIFA World Cup, the Olympic Games

and the European Champions League. They are strong in America; we are strong in

Asia and Europe.48

(Refer Exhibit IX for sponsorship deals).

Exhibit IX: Top Sponsorship Deals of Adidas, Reebok and Nike

Particulars Adidas And Reebok Nike

Sports Football, Basketball, Cricket, Soccer,

Athletics, Hockey, Golf, Tennis,

Rugby

Soccer, Basketball,

Golf, Athletics,

Cycling

Confederations UEFA Champions LeagueTM

, NFL,

NBA, NHL, MLB, MLS, more than 20

Olympic Committees, New Zealand

All Blacks, World XI Team

Brazil Soccer,

Manchester United

(Soccer)

Teams Real Madrid, Milan AC, Bayern

Munich, Liverpool FC, Australian

National Cricket Team, New York

Yankees

St. Louis Cardinals

1 B, San Diego

Chargers, Chicago

Bears, Minnesota

Twins, Pittsburg

Stealers

Events 2006 FIFA World CupTM, Beijing 2008Olympics, Australian Open Tennis

Tournament, Rugby Union, US Major

League Soccer

Athletes/players David Beckham (soccer)

Tracy McGrady (basketball)

Yao Ming (basketball)

Rahul Dravid (Cricket)

Allen Inverson (basketball)

Mahendra Singh Dhoni (Cricket)

Alicia Molik (tennis)

Matt Giteau (rugby)

Lote Tuqiri (rugby)

Andre Agassi (tennis)

Kevin Garnett (basketball)

Tiger Woods (golf)

LeBron James

(basketball)

Michael Jordan

(basketball)

Lance Armstrong

(bicycle racer)

47 DMX is a technology used by Reebok for shoe cushioning which gave strong support to theheel. The shoes were more popular with runners than with other sportspersons.

48 Associated Press, Adidas to Buy Reebok for $3.8 Billion, www.forbes.com, August 03,2005.


17/22


289

Particulars Adidas And Reebok Nike

Endorsements

(Entertainment)

Missy Elliott (rapper)

Christina Ricci (actress)

Lucy Liu (actress)

Mary J. Blige (singer)

Eve (rapper)

Jay-Z (rapper)

50 Cent (rapper)

Nelly Furtado (singer)

Source: Compiled from various sources

Adidas was being promoted by celebrities like David Beckham (Soccer player), Andre

Agassi (tennis player), and Missy Elliott (rapper). Reebok used Yao Ming (basketballplayer), Allen Iverson (basketball player), Jay Z (rapper), 50 Cent (rapper) and Nelly

Furtado (singer) to revitalize its youth appeal. According to analysts, Adidas would

benefit hugely from using Reebok endorser Yao Ming to further expand its business in

China. Hainer said, Yao is with Reebok at the moment, but there may be a time when

he will be helpful for both brands.49

Integration Issues

Adidas said the companies would grow as a combined entity but would retain separate

management. The companies also ruled out any workforce reductions. The new entity

would continue to have separate headquarters and their individual sales forces.

The companies would also keep most of the distribution centers independent and

would have separate advertising programs for their brands. Hainer said, The brands

will be kept separate because each brand has a lot of value and it would be stupid to

bring them together. The companies would continue selling products under respective

brand names and labels.50Adidas declared that the deal would involve investment in

both Adidas and Reebok. These investments would guide the companies towards

effective consolidation.

Some analysts warned that repositioning the two brands would be a difficult exercise.

As John Barker, president, DZP Marketing Communications said, The real challenge

is in marketing brands which are indeed competitors. The real danger may be in trying

to reposition one brand or another to not compete. ... Both brands could be diluted in

the process.51 Analysts were concerned that Adidas would have to support twoseparate brand identities when rival Nike was intensely focused on a single identity

represented by the Swoosh logo (Refer Exhibit X for the logos of Adidas, Reebok

and Nike). Most people probably don'tknow what the Adidas logo looks like. But

49 Adidas C.E.O. Herbert Hainer & Reebok C.E.O. Paul Fireman Share Their Game Plan,www.finance.lycos.com, August 08, 2005.

50 Press Release Reebok Transaction and First Half Year Results 2005 Financial ResultsPresentation, www.adidas-salomon.com, August 03, 2005.

51 Laura Petrecca and Theresa Howard, Adidas-Reebok Merger Lets Rivals Nip at NikesHeels, www.usatoday.com, August 04, 2005.


18/22


290

everybody knows what the Swoosh is. It's a tough problem they face and I don't see

how Reebok helps Adidas with that problem52, said Jack Trout, a veteran sports and

marketing consultant. However, marketing guru, Al Ries, (Ries and Ries Consulting)

felt that Adidas would in fact get strong leverage with Reebok. He remarked, Short

term, there are going to be problems putting the two brands together. But in the long

term, Adidas will be strengthened.53

Exhibit X:

The Swoosh Logo of Nike

Source: www.nike.com

The Three Stripes Logo of Adidas


Contd...

52 William McCall, Double-Teaming the Swoosh, www.signonsandiego.com, August 20,2005.

53 The Merger of Titans, November 2005, Effective Executive, IUP India.


19/22


291

Contd...

Reebok Logo

Source: Google Images/ www.fitness-equipment.uk.com

The Track Ahead

Analysts had varied opinions about the deal. Some analysts felt that Adidas could beat

Nike to become the industry leader. Al Ries said that, The biggest benefit is that it

removes a competitor. Now, all they need to do is to focus all their efforts on

competing with Nike.54

However, a few analysts opined that it was impossible to

dislodge Nike from its No. 1 position. Nike was a preferred brand because of its

fashion status, colors, and combinations. Although Adidas was perceived to have

good quality products that offered comfort and Reebok was perceived as a cool

brand, Nike was perceived as having both hipness and quality. Nick Liddell,

director, brand valuation at Interbrand55

said, Nike is a much focused brand, based on

sporting excellence and product innovation, linking both sportswear and urban life

wear.57

Analysts Hans-Peter Wodniok, a partner at Fairesearch56

noted that Adidas did not

have a good track record with bigger acquisitions. He said, Salomon was a flop. ... I'd

like more details on what's going to happen after the deal (with Reebok) is closed.57

Wodniok added that to make the acquisition a success, radical change would be

needed. Adidas had stated that the divestment of Salomon in May 2005 was

undertaken in order for Adidas to concentrate on its strengths in the athletic footwear

and apparel market and the growing golf market.

Some analysts noted that the deal would give Adidas an advantage only in the U.S.

market. Joerg Frey, analyst, Sal Oppenheim

58

said, We are skeptical because the deal

54 The Merger of Titans, November 2005, Effective Executive, IUP India.55 Interbrand Corporation is a global branding consultancy offering services in brand strategy,

corporate identity, and name development.56 Fairesearch, is an independent research company for institutional investors, banks and

brokers, founded in 2003.57 News Snap, Adidas to Buy Reebok; 2Q Net Profit Rises 50%, www.news.morningstar.com,

August 03 2005.58 It is one of the leading private banks in Europe established in 1789. Its core business areas are

Asset Management and Investment Banking. It is headquartered in Vienna and earned157million in fiscal 2004.


20/22


292

is driven by US expansion plans and offer few synergies.59

If they really try to

operate the two brands the same way they have been competing with each other

theres not a heck of a lot of synergy there, said Matt Powell, senior contributing

editor at Sports Executive weekly.60 Experts said that the two companies were

adopting a defensive strategy by joining together. As Finlayson said, The message

Adidas is making is We cant cut it alone in the US, noting that there would be

little by means of production synergies.61

There are possibilities of mergers happening in the sporting goods industry in the

future considering the merger between Adidas and Reebok. Analysts remarked that it

was improbable that Nike would launch a rival bid for Reebok. However, experts did

not rule out the possibility that Nike could instead be lured to acquire another German

rival, Puma.

59 Reuters, Adidas to Buy Reebok for $4bn, www.eonomictimes.indiatimes.com, August 04,2005.

60 Helen Jung, Adidas + Reebok = Contender, www.oregonlive.com, August 04, 2005.61 Jennifer Letki, Adidas to Buy Reebok; 2Q Net Profit Rises50%,

www.news.morningstar.com, August 03, 2005.


21/22


293

Additional Readings & References:

1. Adidas agrees to buy rival Reebok, www.news.bbc.co.uk, August 11, 2005.

2. Reuters Sales growth, not cost cut, united Adidas, Reebok,www.economictimes. indiatimes.com, August 11, 2005.

3. After Reebok-Adidas deal, US shoemaking hangs by a lace ,www.usatoday.com,August 09, 2005.

4. Darren Rovell, Reebok Adidas have plenty of issues to solve ,www.ESPN.com,August 03, 2005.

5. Press Release, Adidas-Salomon to combine with Reebok and create 9

billion footprint in global athletic footwear, apparel and hardware

markets, www.adidas-salomon.com, August 03, 2005.

6. Press Release, Reebok Transaction and First Half Year Results 2005Financial Results Presentation, www.adidas-salomon.com, August 03,2005.

7. Adidas buys Reebok, www.prepstars.com, August 03, 2005.

8. Steve Goldstein, Adidas paying $3.8 billion for Reebok,www.smartmoney.com,August 03, 2005.

9. Oren Harari, Intangible Adidas, www.harari.com, August 09, 2005.

10. Daisuke Wakabayashi, Adidas, Reebok eye sales growth, not just cuts ,www.business.com, August 10, 2005.

11.

William Spain, Merger puts Nike in rivals sights, www.cbs.marketwatch.com,August 03, 2005.

12. Adidas holds takeover talks with U.S. rival Reebok- FT,www.centerformarketintelligence.com, August 02, 2005.

13. Ben Richardson, Adidas bid raises image concerns, www.noozy.net, August03, 2005.

14. Three stripes and youre out as rivals target Adidas design , www.ft.com,July 04, 2005.

15. Associated Press, Buyout long time coming for Reebok CEO,www.forbes.com,August 14, 2005.

16.

Associated Press, Reebok CEO Paul Fireman at a glance, www.forbes.com,August 14, 2005.

17. Laura Petrecca and Theresa Howard, Adidas-Reebok merger lets rivals nipat Nikes heels, www.usatoday.com, August 04, 2005.

18. Jennifer Letki, Adidas to buy Reebok; 2Q net profit rises 50% ,www.news.morningstar.com, August 03, 2005.

19. Helen Jung, Adidas + Reebok = Contender, www.oregonlive.com, August04, 2005.

20. Stefan Nicola, Analysis: Adidas to challenge Nike, www.wpherald.com,August 04, 2005.


22/22


294

21. Two shoes firms merge while a third thrives, www.billwallacesports.com

22. Associated Press, Sportswear maker Adidas to buy Reebok,www.wvtsam950.com

23. Jennifer King, Adidas + Reebok = Foot stompin new market share,www.ruggedelegantliving.com, August 03, 2005.

24. Parija Bhatnagar, Cheaper sneakers on the way? www.money.cnn.com,August 04, 2005.

25. Reuters, Adidas to buy Reebok for $4 bn,www.economictimes.indiatimes.com,August 04, 2005.

26. David Kiley, Reebok and Adidas: a good fit, www.businessweek.com,August 03, 2005.

27. www.adidas-salomon.com

28.

www.reebok.com.

29. www.centerformarketintelligence.com

30. www.moneycentral.com

31. www.answers.com

32. www.forbes.com

33. www.grainmarketresearch.com

34. www.uk.finance.yahoo.com

35. www.geocities.com

36. www.today.reuters.com

37.

www.bigcharts.marketwatch.com

38. www.finance.yahoo.com

39. www.sgma.com

40. www.aberdeen.com

Documents

Case 3 The Adidas – Reebok Merger.pdf